9 Privatization in Tunisia: Objectives and Limits

Saíd El-Naggar
Published Date:
June 1989
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Mohammed Bouaouaja


With the advent of Tunisian independence, it became apparent that direct state intervention in companies was imperative. On the eve of independence, the country’s economy was characterized by the predominance of the colonial private sector and a lack of sufficient national private capital and experience in most branches of economic activity—with the exception of traditional agriculture, trade, and craftsmanship. When the colonists left for good, their companies and firms could therefore only be taken over by the young Tunisian state, which mobilized its available managerial manpower and financial means to this end. This takeover took the shape of nationalization, especially of public service companies in fields such as transport, and the strategic mining and energy sectors. These takeovers were followed by a restructuring and reinforcing of the newly transformed entities, where necessary, into companies according to Tunisian law. State intervention in the productive sectors was again reinforced following the nationalization of land in 1964.

Seen initially as a necessity, state intervention in commercial companies became a clear political choice as early as 1961, when the public authorities opted for a socialist system founded on planning as a means of regulating and conducting the economic policies of the Government.

The creation by the state of new companies with public capital, and managed directly by officials of the Administration, became the favored means of achieving the economic and social objectives of government policy. It fell to these state companies to revitalize and direct investment toward priority sectors, to achieve a high rate of growth, to set up regional development goals, and to boost exports. However, these companies were also called upon to promote the social policies of the public authorities in the areas of job creation, income distribution, and market supplies to cope with consumers demands and the need for price controls, with a view to maintaining purchasing power.

Thus, the public sector’s share of different branches of the economy has long been predominant in terms of both investment and employment as well as its contribution to the gross domestic product.

Over the first decade of development the public sector accounted for between 55 and 60 percent of all investments. Over the second decade (or since 1971), the emergence of new private promoters, encouraged by the state, has somewhat improved the share of the nonstate sector, especially in manufacturing, trade, and services. But this tendency has not reduced the relative size of the public sector in terms of overall investments, and more particularly in agriculture and nonmanufacturing industries.

Assessment of the Performance of the Public Sector

From a macroeconomic point of view, the positive results of direct state intervention in companies are undeniable. As a result of such intervention, a high investment rate was achieved at a time when private capital was almost nonexistent and when national savings were still very low. This massive investment brought about strong growth in production, allowing for large-scale job creation and broad income distribution. Furthermore, it promoted a considerable influx of technology. The improvement of Tunisian production through increasingly elaborate transformation techniques helped to improve the terms and structure of foreign trade.

In social terms, state intervention helped to control price increases, thus preserving the purchasing power of consumers whose demands were largely satisfied by adequate market supplies. In the field of public services, state companies, in consideration of users’ means, were induced to charge well below cost price. These results were in agreement with the objectives of the public authorities and with public expectations, especially with regard to growth, job creation, and price controls. However, the costs they entailed for the community and the state proved to be very high and increasingly unacceptable.

The multitude of often contradictory objectives assigned to public companies was bound to have a distorting effect on their activities and to impose intolerable supplementary expenses. To this must be added bad investment choices and inadequate financing plans, characterized by insufficient capital and excessive short-term borrowing.

On the whole, with a few rare exceptions, the financial and economic performance of the public sector has been very poor and constantly deteriorating. Economic profitability was insufficient from the outset, owing to high management costs and sales prices that were limited both by general purchasing power and by controls imposed by the public authorities. Capital investment yield, also weak, has tended to decline as a result of poor choices of technology, underutilization of production capacity, and the high proportion of investments with delayed productivity, as well as social investments (housing). The discrepancies that have arisen between salaries and productivity in public companies should also be mentioned; because of the highly rigid character of the job market, this has been impossible to correct. Finally, far from contributing to the state budget, state companies have been a heavy burden on public finance, which has had to make up for growing deficits each year with larger and larger subsidies.

The combination of all of these factors brought about a steady deterioration in the financial situation of the public companies, which has become increasingly burdensome on the state budget and on other sectors of the economy by absorbing increasingly heavy investments and operating subsidies every year. The state’s fairly limited financial resources made a delay in subsidies and resort to economically unjustified bank overdrafts inevitable.

By the end of the first decade, most of the companies were already experiencing such serious financial imbalances that getting back onto a sound footing, or rehabilitation, was one of the main concerns of the public authorities. To this end a National Commission was established. Even after the October 1979 change of course in economic policies, however—which were more liberal—there was no question of privatization, but only of rehabilitation. In fact, throughout the 1970s, and in spite of the development of a parallel private sector resulting from the many incentives and exemptions granted by the Government, public companies continued to exist and even grow. Some of them created subsidiaries, thus broadening the public sector and strengthening direct and indirect state intervention in the productive sector.

In the 1970s, therefore, the economy was characterized by the coexistence of both public and private sectors. While the budding private sector was enjoying a range of benefits and safeguards, the public sector was in the throes of increasing difficulties. This situation continued into the 1980s in spite of the growing problems experienced by the economy as a result of internal and external factors.

The Tunisian Experience with Privatization

Public companies were the first to feel the blow, running up increasingly heavy operating deficits at a time when the state itself was unable to balance public finance. A special operation in 1983, which consisted of revaluing the Central Bank’s currency holdings to release 90 million dinars for the public companies consolidation fund, only delayed the inevitable restructuring operations.

It had been known for some time that without any real restructuring of these companies one-shot financial rehabilitations were insufficient to redress their positions. After a while, in a never-ending cycle of cause and effect, the situation of the rehabilitated companies deteriorated once more, with the inevitable need for a new injection of financing.

The Need for Privatization

Public authorities would be amply justified in calling into question state intervention in the economic field by reason of the following:

  • The many difficulties encountered by public companies in both their daily management and their development efforts; repeated financial disequilibria are becoming increasingly serious.
  • The state’s incapacity to deal with this in view of its decreasing resources.
  • The Administration’s difficulty in following up and checking management in the public sector.

Discussions that were initiated in the early 1980s finally gave rise to the setting up within the Sixth Plan of a restructuring program aimed essentially at defining the field of state intervention and reorganizing its participation portfolio. Act No. 85–72 of July 20, 1985 defines public companies as those in which state or local public bodies own at least 34 percent of the capital. These companies are under the supervision of the Administration and are subject to legal conditions on the conclusion of contracts. Furthermore, companies in which half of the capital is owned exclusively by a public parent company, or jointly with state or local public bodies, are under the supervision of the parent company.

This Act helped to define the sphere of intervention of the supervisory body and provided for the reorganization of the state’s portfolio. However, it did not envisage the possibility of privatization, or the ways and means of achieving it. Furthermore, the imposition of state control over companies in which the state owned over 34 percent, but no more than half, of the capital tends to hamstring the management of companies in this category, that is, companies in which more than half of the capital is privately owned. This is then an obstacle to any privatization operation aimed at producing such a capital structure. Many companies in this category have thus been affected and have suffered the negative consequences of this legislation in their day-today management.

Even before this Act was implemented—in the middle of the 1986 crisis, when public companies were once again deteriorating—new discussions on the problem began. At the same time, under the pressure of internal and external constraints, the disequilibria of public finance and foreign payments became intolerable.

The state’s policy of disengagement was announced as part of the recovery program and was further elaborated in the Seventh Plan for Economic and Social Development of 1987. This policy was clearer and more voluntarist. Act No. 87–47 of August 2, 1987 provided a general framework for the restructuring of public companies with the goal of progressive privatization.

Privatization is thus seen as the transfer of shares or the sale of public company assets. In this respect the Act provided for a number of financial and tax benefits for private buyers and set up commissions with responsibility for assessing the companies to be privatized, to avoid disputes. Finally, the companies to be privatized were due to be included in a list published by decree. These new, rather sophisticated provisions may be somewhat difficult to implement.

The establishment of these commissions was in response to the Government’s desire to assess companies belonging to the state that were due to be transferred to private ownership. However, the operation of these commissions was to prove very difficult in practice. Furthermore, to forestall expectations that might distort market conditions, the list of companies to be privatized was not published. In spite of these reservations, a clear political choice has been made for the wide-ranging privatization of companies in the competitive sector, and steps have already been taken to carry it out under the best possible conditions.

One of the factors in favor of privatization is the situation of most of the public companies, which have accumulated substantial losses and debts, both to the Administration and to social security and the banks. Moreover, most of them are at a point where they need to reequip to be able to return to normal activities, which requires a new injection of financing that the state is incapable of providing in this period of uncertainty. Even if they could be re-equipped, most of these units could not return to operating conditions that would make them profitable. In addition to having heavy structural expenses, these companies are overstaffed, and in most cases the staff are overpaid in terms of their own productivity and in comparison with the private sector.

All of these factors support the political choice of an inevitable progressive disengagement of the state with regard to the productive sector. This disengagement will, however, be limited to the competitive, nonstrategic sectors. This means that the state has chosen to continue to intervene directly in companies in strategic sectors such as chemistry, and in public services such as rail and urban transport in view of their social nature. Nevertheless, while the political option for state disengagement from public companies and the types of activity of these companies seems clear, the same cannot be said of the ways and means of doing this, or similarly of the speed at which the transfer to the private sector should take place.

Ways and Means of Privatization

Among the problems of the ways and means of achieving privatization are the following:

  • The legal procedure to be followed to ensure that the transfer operation is considered to be within the law.
  • How to determine the transfer value of the company or state shares, to prevent officials from being accused of selling off public property at reduced prices.
  • Determining the eligibility of buyers: private, employees, non-residents, politico-financial interest groups, etc.

Thus, privatization is seen as a permanent, total, or partial transfer of shares or assets from the public to the private sector.

Other ways and means of privatization should also be recommended. First, there could be management, either free or on account, with the means of production remaining state property. This method has the advantage of circumventing the problem of assessing the assets while giving the company the chance of being better managed (although the problem of rent may in this case be just as difficult). This procedure is fairly widespread in certain localities, where community property is rented out to private managers through periodic invitations to tender or by means of public auctions. But it has not been widely practiced in the case of large state companies, with the exception of certain public sector hotels managed by private chains.

Second, privatization could take the form of joint ventures between the public and private sectors. However, there is the problem of management and control by the Administration, which in the past has been a source of misunderstanding and the cause of poor company operations.

Finally, privatization could be encouraged by allowing a greater degree of competition between public and private companies within a single sector. This is a natural development that has the advantage of not posing the problem of transfer in the future. Furthermore, it follows on implicitly from the program of investment liberalization, which aims to do away with official approval to set up new companies.

Privatization will therefore take the shape of the free creation of a number of new units controlled by private interests. These companies will have to compete with existing public companies and will lose their monopoly. In the face of such competition, public companies will have to restructure to reach the same level of productivity or risk being forced out of the market. The chances of public companies successfully coping with competition are, with a very few exceptions, somewhat remote, even if internal factors become favorable—for instance, good management, staff reductions, or the introduction of commercial methods.

Remaining under the supervision of the Administration constitutes a serious handicap for public companies because of excessive control. This sort of change in environment requires that a public company’s management should be able to make rapid decisions and be flexible in its maneuvers. Moreover, the Administration or its representatives have a tendency to increase company expenses, thereby incurring financial sacrifices without compensation, as the company has to create jobs beyond production needs as far as prices and salaries are concerned. Yet public companies are not always free to set an adequate salary level that allows them to retain the competence that is needed to cope with competition.

This situation has other disadvantages—especially when it is first introduced—in a country that has only limited resources, and which moreover has to import its equipment. This type of restructuring will entail, in the event that the company should fail, a loss of material and the importation of similar material by private companies, which on a national level constitutes a squandering of resources. This factor more than any other explains the desire of the public authorities to sell the assets of these companies before private interests are allowed to carry out new projects on a large scale, as this might result in the liquidation or elimination of the public company. Similarly, private companies prefer to acquire material already in place rather than import it, which entails delays and high prices owing to inflation.

The first stage of privatization is, then, the transfer of the means of production from the public to the private sector. Subsequently the economy will be liberalized by the creation of a multitude of new private units. The only exception to this rule is the Société Hôtelière et Touristique de Tunisie (SHTT), which survived competition from the private sector albeit under conditions that had become impossible, which is what forced it to sell its hotels.

Assessing the Experience

In spite of the hesitation and difficulties encountered in defining a strategy for privatization and restructuring of the public sector, a number of operations have been completed with fairly significant results. Some of them were embarked upon even before the general restructuring program was finalized and announced by the Government. They constitute the end product of the investigation of the individual situation of each of the companies in question, which was a matter of increasing concern.

In the absence of an overall framework, this restructuring took a number of different forms according to each case. Three large companies underwent large-scale restructuring, which led to the privatization of most of their property. The companies in question were Sogitex, Sotimaco, and SHTT.


Set up in 1960 with public capital, the Société Générale des Industries Textiles bought up existing workshops when Tunisia became independent. The Société subsequently developed new production capacities. For the reasons given above, this company encountered a number of financial and commercial difficulties. It had to bear much higher salary expenses than in the private sector, and this was aggravated by overstaffing of about one third. Compared with the private sector, productivity was much lower.

Initially, the company was broken down into several specialized units with homogeneous activities that were each transformed into a holding company: SITEX (spinning and weaving for export); Tissmok (spinning and weaving for the local market); Siter (finishing for the local market); and, finally, a group manufacturing clothes for the local market and for export.

This restructuring greatly facilitated privatization by putting the smaller units on a level with the capacity of the private sector. In the case of Sitex, specialization made it possible to interest foreign partners who possessed the techniques and controlled the markets in textiles (Swift) and at the same time increased capital. This partner’s participation also encouraged financial establishments to participate: a local development bank and the International Finance Corporation, an affiliate of the World Bank Group, which was thus able to implement its policy of promoting the private sector. This policy was expressed by the gradual disengagement of the holding company, and consequently the state, even though it was not easy at first to convince Sogitex to agree to a reduction of its share below the blocking minority level.

Owing to their highly unbalanced financial situation and their internal market orientation, the other companies of the group were not able to attract private partners with the same degree of success. In the case of Somotex, the development banks were reluctant to participate, in spite of strong pressure from the public authorities.

In cases where the private sector becomes interested, it is the representative of the public sector who shows great reluctance to disengage and will not agree to have its share reduced below a certain minimum (generally a third of the capital), to be able to continue to exercise its blocking minority right. Furthermore, the 1985 law puts these companies under state supervision and subjects them to the rules of concluding public contracts.


The second noteworthy case of restructuring is the Société Tunisienne des Industries et Matériaux de Construction (Sotimaco). Set up in 1960, this company was supposed to take over the construction material factories that had just been nationalized by the Government, but it was subsequently induced to set up new factories, thus helping to develop the sector by introducing new technologies on the one hand and training managerial staff and creating jobs on the other. But this situation was bound to cause financial difficulties for this public company, which was restructured and transformed into a holding company that had central control of the units of the group and provided them with a certain number of common services. The priority given to job creation, the financial imbalances (insufficiency of own funds), and the inadequacy of financing plans only aggravated the difficulties encountered by this company. Finally, it was put into liquidation and its assets were sold off after assessment.


The Société Hôteliére et Touristique de Tunisie (SHTT) constitutes another model of privatization that in recent years has had a certain degree of success. Set up in 1959 almost solely with public capital, the Société Hôteliére et Touristique de Tunisie was to be the instrument for attaining objectives in hotel creation, especially on the coast, at a time when the country’s accommodation capacity was practically nonexistent and the private sector was still in an embryonic stage.

With initially limited financial means, this company’s job was to achieve the rapid development of the country’s hotel capacity and a high employment level, in accordance with the objectives of the public authorities. Furthermore, it was left to finance the necessary infrastructure at a time when the Administration had only begun to intervene in this domain. Under such conditions, the company suffered from chronic financial imbalances, which were aggravated by the payment of high wages to an excessive number of staff. Of course, repeated rehabilitation and injections of new resources were carried out, but often somewhat late; they were able to provide only a partial solution to the problems of this company.

At the same time, the private hotel sector was undergoing spectacular expansion, thanks to the substantial incentives granted by the state, which, moreover, had spared it from the socialist experiment of the 1960s. This gradually weakened the intervention of SHTT in this sector but without easing its financial difficulties. Thus, at the beginning of 1983, the Government decided to sell all or part of the 14 hotel units owned by SHTT. This operation took place in three main stages: First, units were made over to the Société Tunisienne de Banque to pay off most of the latter’s claims on SHTT. This operation took the form of an overall settlement between the two public bodies, which turned out to be satisfactory to both parties. Second, two other large hotels were sold on the international market to private buyers, but not without some difficulty. In the final stage, units still managed by SHTT are themselves due to be sold to other potential buyers. These operations have enabled the company to realize sizable latent capital gains on its real estate assets, which covered most of its debts. By the end of this program, SHTT should be in a position to repay all of its debts and perhaps even to show a surplus. Furthermore, thanks to the present scope of the sector, its restructuring should entail almost no disruption of the hotel and tourist trade.

Obstacles to Privatization

Resistance from Those Concerned

Resistance to privatization does exist and can be difficult to overcome, although it rarely, if ever, manifests itself clearly. Resistance may be found above all among company directors, who have the support of those in managerial positions. To delay or avoid the decision to privatize, company directors may try to propose alternative programs of rehabilitation and development in an effort to save the company. Furthermore, when the decision has been taken by the authorities, these directors may try to delay its application, pleading all sorts of difficulties, especially resistance from employees and a worsening of the working atmosphere. This attitude on the part of the directors and managers may be explained in many cases by their attachment to the company, which they often try to save with great devotion. For them liquidation or sale is taken as a severe criticism of their management record. If a new director is appointed when the decision to liquidate or sell off is taken, or just after, it is difficult for him to admit that his mission is to liquidate the company; he will therefore propose alternative plans to preserve the company or even develop it. The supervisory department may also take a dim view of selling off a public company that has enabled it to intervene more directly in the social and economic spheres.

But the most vociferous opposition comes from employees, who quite rightly see that the liquidation of their company means they will sooner or later lose their jobs and main source of income. This threat to their future is felt all the more sharply because they work in a company where there is overstaffing, and where salaries and welfare benefits are distinctly better than in the private sector. Their chances of being kept on in their jobs at the same salary level once the company is privatized are very poor, therefore, and this to a large extent explains their anxiety.

Fully conscious of this opposition, the authorities include in each program of rehabilitation, restructuring, or sale a substantial welfare component, with a series of options for employees who are willing to leave the company, while as far as possible preserving their source of income. The options most generally proposed are early retirement, transfer to another company, financial aid for a project, redundancy with compensation, or a share in the productive resources of the company’s assets.

Lack of an Adequate Private Capital Market

After the welfare aspect, the lack of a private capital market is the second main obstacle to privatization. The capital market provides both a framework and a mechanism that facilitate privatization and give the private sector the necessary resources to acquire a part of the state’s portfolio.

As for the first function, the difficulty is principally the frozen nature of the portfolio held by the state. Shares in public companies may not be traded on the stock market, mainly because of the financial disequilibrium caused by the losses that most of them have accumulated. Of course, preliminary rehabilitation would tend to redress the equilibrium of these companies, but this alone is not sufficient to enable them to be quoted on the stock market. Furthermore, a preliminary rehabilitation usually implies the contribution of new resources that the state, subject to a fairly rigorous adjustment program, is not in a position to mobilize.

The impossibility or, at the very least, difficulty of floating shares on the stock market according to the laws of supply and demand thus constitutes an obstacle to privatization. Furthermore, the absence of a sufficiently broad and plentiful capital market makes it impossible to mobilize enough resources to sell off state assets to the private sector. This problem is further complicated by the fact that most public companies are heavily in debt to the tax administration, social security, and especially the banks. Even if it were possible to mobilize resources outside the institutional channels of the finance market, the financial capacities of the private sector are still very limited, and where they are sufficient the tax system does not allow them to be mobilized easily.

Finally, any drawing on financial resources in favor of the state is accompanied by a corresponding drop in the capital available for investment in new projects.

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